Now The Markets Themselves Are Too Big To Fail

The First
Rebuttal website has coined a term that gets to the heart of an increasingly
dysfunctional system: The too-big-to-fail stock market. The general thesis
is that most major countries are over-leveraged to that point of maybe being
unable to survive a garden variety equities bear market – and are doing their
best to avoid finding out. Here's First Rebuttal on the effects of such a
prop-up-asset-prices-at-any-cost policy:

The structural economic problems of stalled incomes, peaked debt and welfare
make operational expansion i.e. sustainable growth extremely difficult, which
has led to investment concentration in secondary equity markets. And that
means the higher valuations simply represent higher risks.

The offshoot is that as such a large concentration of total asset value
is dependent on the market, it becomes necessary to maintain the market at
all costs. The market has become too systemically important to allow it to
fail. And that means policymakers have changed the function of the market.
The market left to its own devices is a consequence of the underlying economy.
Today, however, the market is being used as a (false) portrayal of the underlying
economy. It is intentionally using the logical fallacy of confusing cause
and effect.

That is, the thermostat is no longer meant to reflect the temperature inside
the house, its only use is to convince you the house is warm. That means
policies are being targeted at manipulating the thermostat rather than keeping
the furnace hot. The consequence is a spiraling of resource misallocation,
furthering the structural breakdown of economic activity making it ever more
important to keep the market looking strong. The market is no longer a market
as we understand the term.

The upshot: Markets no longer serve their intended purpose of efficiently
allocating capital. Since capitalist wealth creation depends on that function,
today's world can no longer be called “free” or “market-based” in any meaningful
sense.

The article illustrates this phase change with a chart showing equity P/E
ratios over the past century-and-a-half which reveals a dramatic spike beginning
in the 1990s – that is, when Alan Greenspan and his successors at the Fed decided
that the big banks had to be protected from the folly of their own mistakes.

So what does this mean? First, while headlines continue to convey a sense
of normality, under the surface the system is rotting away. Good jobs are becoming
scarce and capital is being directed towards things that will never generate
enough cash flow to pay off the related debt. (Rising) financial asset prices
are increasingly disconnected from the (falling) value of underlying assets.

The evidence of this is everywhere, from pension plans that lie about their
funding levels, to corporations that report non-gap earnings and are rewarded
with higher share prices, to governments that report plunging unemployment
rates while citizens leave the workforce in droves.

It's no longer possible, in short, for most people to tell what's real and
what's not. And since markets' main function is to reveal underlying truths,
it's not a surprise that governments have decided to hijack the message.

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.